``Crashes and Panics: The Lessons from History,`` edited by Eugene N. White, Dow-Jones Irwin, Homewood, 260 pages, $32.50.
If you`re one of those investors who takes a perverse delight in the stock market`s foibles and failures, or find yourself fascinated by the financial world`s pratfalls to the depths of gloom, here`s a chance to wallow in the crises that devastate human expectations.
Whether the Tulip Mania of 1637, the Crash of 1929 or the thunderous declines of 1873 or 1987, they`re all here.
Be warned, though: If you`re one of those conservative investors who expects to be settled atop a safe hoard of cash several decades from now, this could provide the material to turn your hair prematurely chalky.
The book was occasioned by the Crash of 1987.
``The long respite between 1929 and 1987 suggested that a crash could never occur again,`` says editor White, of Rutgers University, in his preface. The book brings together more than a score of academics, who seek to answer questions about what went wrong. They look not only at the cataclysmic collapse of Oct. 19, 1987, in which the Dow Jones industrial average fell 508 points, but prior breakdowns of financial systems in numerous countries.
The conclusions are not entirely encouraging. Nor is the reading always easy; expect to encounter some relatively arcane mathematical formulas. And don`t look for simple answers.
Do you believe that panics always stem from the banking system? There is ample evidence here that bank panics ignite stock crashes, recessions, even depressions.
Included are seven banking panics that occurred during the 19th Century. But wait. There also is a recounting of stunning downturns that took place when a so-called lender of last resort was available.
For instance, there was no bank panic in 1929 or 1987. In the 1930s, bank failures followed the crash, but they did not trigger it.
Are you convinced that world trade imbalances cause financial chaos? The book explores, in some detail, the role of the notorious Smoot-Hawley tariff in helping cause the Crash of `29. But it doesn`t point a clear finger of blame.
Do you think the fault lies in global investing? Don`t miss the chapters on the Panic of 1873, which struck all continents, setting off a six-year depression in Germany and attendant problems elsewhere, including this side of the Atlantic.
Some conclusions of the book are surprising. For instance, most investors think the safest refuge is in bonds. So why was the decade of the 1980s the most volatile in history for the bond market?
Also, it is common to assume that a panic or crash will last for a few days or, at most, weeks. So why do the symptoms sometimes take years to work out?
A dilemma facing the numerous authors in this book is the lack of a single definition for a panic or crash. Likewise, whether a particular bull market constitutes an investment ``bubble`` may be open to interpretation.
There is, though, one point of agreement:
``Panics occurred at business cycle peaks when a recession predictor spiked,`` says Gary Gorton, assistant professor of finance at the Wharton School of the University of Pennsylvania, in his chapter on banking panics and stock market crashes of the late 19th Century.
There are numerous studies in this volume detailing financial crises long past. For instance, how many of us recall the Crash of 1946? For those who have forgotten, stock prices fell 4.4 percent, setting off considerable anguish and soul-searching.
Professor Merton Miller of the University of Chicago`s Graduate School of Business has written a chapter on this event, which was the subject of a special study by the staff of the Securities and Exchange Commission.
Blame was impossible to fix exactly. But the list of suspects provides a precursor of complaints heard in 1987. That list included a set of so-called mechanical selling rules, a kind of primitive portfolio insurance, as well as the now somewhat obscure Dow Theory. The Dow Theory holds that, when three indexes of stock prices fail to rise together, or ``confirm,`` it`s time to sell. In September 1946, a lot of investors did just that.
Are you still looking for the real cause of the Crash of `29? How about call money?
Editor White pinpoints this source of cash, otherwise known as brokers`
loans, as a possible factor. When farmers demanded money to pay for their harvest in the fall of 1929, it squeezed Wall Street, where banks called in loans.
But how much did that contribute to the crash? The answer remains a subject of debate.
For much of financial history in the last several centuries, panics have occurred every 10 years, with some regularity. The question, of course, is how deep they will become.
No one can say for sure. Even the current situation, with its wild cards of war and recession, could end quickly or last for many months.
The messages in this book are multitudinous, but one stands out:
Investors, proceed with humility when trying to predict what will happen to your hard-earned holdings.